Development in International Accounting Standards Setting Jamie Wang Associate Professor University of Wisconsin-Parkside

Internationalization There is considerable evidence that companies are increasingly operating in a global marketplace. There is considerable evidence that companies are increasingly operating in a global marketplace. Trade: from 1970 to 1998, world trade has grown from 600 billion to 10,500 billion Trade: from 1970 to 1998, world trade has grown from 600 billion to 10,500 billion Strategic alliances Strategic alliances Foreign direct investment Foreign direct investment Portfolio investment Portfolio investment

Today the world’s capital markets know no borders. Today the world’s capital markets know no borders. The participants in those markets need high quality, transparent, and comparable financial information to enable them to make sound economic decisions. The participants in those markets need high quality, transparent, and comparable financial information to enable them to make sound economic decisions.

The diverse accounting and reporting practices across the world have been one of the major obstacles to economic globalization. The diverse accounting and reporting practices across the world have been one of the major obstacles to economic globalization.

Goodwill Accounting Goodwill is the excess of acquisition price paid to acquire another company over the total fair value of that company’s net assets. Goodwill is the excess of acquisition price paid to acquire another company over the total fair value of that company’s net assets. Goodwill = (Cost of investment) Goodwill = (Cost of investment) – (FV of all identifiable net assets) – (FV of all identifiable net assets)

When Disney paid $18 billion dollars for ABC whose all identifiable net assets had a fair value of $6 billion, approximately $12 billion were paid for goodwill. When Disney paid $18 billion dollars for ABC whose all identifiable net assets had a fair value of $6 billion, approximately $12 billion were paid for goodwill. 90% of the $12.9 billion Phillip Morris paid for Kraft Food was for goodwill. 90% of the $12.9 billion Phillip Morris paid for Kraft Food was for goodwill.

Goodwill Amortization For the $12 billion goodwill recorded by Disney, Disney will have to charge the following amount as an amortization expense and deduct it from income: For the $12 billion goodwill recorded by Disney, Disney will have to charge the following amount as an amortization expense and deduct it from income: $2,400,000,000 according to Japanese GAAP $2,400,000,000 according to Japanese GAAP $1,200,000,000 according to Swedish GAAP $1,200,000,000 according to Swedish GAAP $ 600,000,000 according to Denmark GAAP $ 600,000,000 according to Denmark GAAP $ 300,000,000 according to Canadian GAAP $ 300,000,000 according to Canadian GAAP $ 0 according to U.S. GAAP $ 0 according to U.S. GAAP

Obviously, there is a need for international accounting harmonization. Obviously, there is a need for international accounting harmonization. Using U.S. standards Using U.S. standards Creating an international accounting standards Creating an international accounting standards

In 1973, International Accounting Standards Committee (IASC) was established by professional accounting bodies from nine countries: the U.S., Canada, Australia, France, Germany, Japan, Mexico, Netherlands, and U.K. In 1973, International Accounting Standards Committee (IASC) was established by professional accounting bodies from nine countries: the U.S., Canada, Australia, France, Germany, Japan, Mexico, Netherlands, and U.K. The organization was renamed “International Accounting Standards Board” (IASB) in 2001 The organization was renamed “International Accounting Standards Board” (IASB) in 2001

1n 1975, first International Accounting Standard (IAS) was published. 1n 1975, first International Accounting Standard (IAS) was published. IAS No. 1 “Disclosure of Accounting Policies” IAS No. 1 “Disclosure of Accounting Policies” Since then, 41 international accounting standards have been issued. Since then, 41 international accounting standards have been issued.

IAS in Europe EU has adopted the “financial reporting strategy” which requires companies of all EU countries (including 15 member countries, 3 European Economic Area countries, and 10 additional countries approved for admission into EU in May 2004) to follow IAS for consolidated financial statements no later than EU has adopted the “financial reporting strategy” which requires companies of all EU countries (including 15 member countries, 3 European Economic Area countries, and 10 additional countries approved for admission into EU in May 2004) to follow IAS for consolidated financial statements no later than 2005.

IAS in Asian-Pacific Countries New Zealand and Bangladesh adopted IAS as their national standards New Zealand and Bangladesh adopted IAS as their national standards Australia, Hong Kong, Philippines, and Singapore’s new standards are generally word- for-word IAS Australia, Hong Kong, Philippines, and Singapore’s new standards are generally word- for-word IAS China, Laos, and Myanmar allow domestic companies to use IAS China, Laos, and Myanmar allow domestic companies to use IAS Japan, Pakistan, Thailand, Australia, Hong Kong, New Zealand allow foreign companies to use IAS for listing in their stock exchanges Japan, Pakistan, Thailand, Australia, Hong Kong, New Zealand allow foreign companies to use IAS for listing in their stock exchanges

IAS in Canada It is considering allow foreign companies listed in Canada to use IAS. It is considering allow foreign companies listed in Canada to use IAS.

IAS in the U.S. IAS is not accepted for listing in the U.S. stock exchanges IAS is not accepted for listing in the U.S. stock exchanges The specific requirement is that the foreign issuers either use U.S. GAAP or use their own GAAP (including IAS), but have to reconcile their earnings and net assets to conform to U.S. GAAP, that is, the foreign issuers will have to keep two sets of books. The specific requirement is that the foreign issuers either use U.S. GAAP or use their own GAAP (including IAS), but have to reconcile their earnings and net assets to conform to U.S. GAAP, that is, the foreign issuers will have to keep two sets of books.

Pressure on SEC Currently, there are about 1400 companies from 59 foreign countries listed in the U.S. stock exchange. 40% of these companies are European companies. Currently, there are about 1400 companies from 59 foreign countries listed in the U.S. stock exchange. 40% of these companies are European companies. There is increasing pressure on the SEC to accept IAS There is increasing pressure on the SEC to accept IAS SEC call for the study of the quality of IAS SEC call for the study of the quality of IAS

An Empirical Assessment of Fixed Assets Reported under IAS No. 16 Why IAS No. 16? Why IAS No. 16? Plant assets are one of the most important assets for almost all companies Plant assets are one of the most important assets for almost all companies There is substantial difference between IAS and the U.S. regarding plant assets There is substantial difference between IAS and the U.S. regarding plant assets

Upward Revaluation of Plant Assets Under U.S. GAAP, plant assets are reported at their book value (i.e., original cost less accumulated depreciation). Under U.S. GAAP, plant assets are reported at their book value (i.e., original cost less accumulated depreciation). If the fair value of the assets declines below the book value, companies are required to write down the assets and an impairment loss is recorded in the period of impairment. If the fair value of the assets declines below the book value, companies are required to write down the assets and an impairment loss is recorded in the period of impairment. When the fair value is greater than the book value, upward revaluation is not allowed. When the fair value is greater than the book value, upward revaluation is not allowed.

The rational for such treatment is conservatism. The rational for such treatment is conservatism. In addition, the fair value of plant assets before disposition has to be estimated. Such estimates are necessarily arbitrary. In addition, the fair value of plant assets before disposition has to be estimated. Such estimates are necessarily arbitrary. Management may use such discretion to dress up its financial statements. Management may use such discretion to dress up its financial statements. Potential tax related issues Potential tax related issues

Under IAS No.16, companies are allowed to write their assets up to their fair value (upward revaluation). Under IAS No.16, companies are allowed to write their assets up to their fair value (upward revaluation). Some have expressed significant concerns over this accounting treatment. Some have expressed significant concerns over this accounting treatment. My research examines the quality of reported fixed assets under IAS No.16 My research examines the quality of reported fixed assets under IAS No.16 In the process of collecting data. In the process of collecting data.

Thank you!